CARSON CITY, Nev. (CN) - An insurer that denied coverage to a company whose damaged machinery led to the production of defective plastic bags was improperly ordered to pay more than $9 million, the Nevada Supreme Court ruled.
Plastic bag manufacturer Coast Converters had bought the all-risk insurance policy in question from Federal Insurance in June 2003 after moving its operations from California to Las Vegas.
In addition to providing up to $2 million in property damage coverage, the policy included an additional $1.75 million for business-interruption and extra-expenses coverage.
In August, Coast Converters requested and received an increase in the property-damage coverage of up to $5 million.
When moving into its new Las Vegas facility, faulty electrical upgrades allegedly caused voltage fluctuations that damaged some of Coast Converter's machinery and caused an extensive run of defective bags.
Coast Converters filed an insurance claim with Federal Insurance, which made several payments for the damaged machinery under the property damage portion of the policy and paid up to $1.75 million in business-interruption and extra expenses coverage.
Coast Converters contended, however, that its property-damage coverage should have covered the increased losses from the defective bags.
With Federal Insurance refusing to cover more of the damages, Coast Converters went out of business and sued the insurer in Clark County District Court.
In addition to finding Federal Insurance liable for $4,005,866 for breaching the insurance contract, a jury ordered the insurer to pay $5,048,717 for violating the Nevada Unfair Claims Practices Act (UCPA).
The district court offset the award by amounts Coast Converters obtained from other parties but refused to offset the award by the amount Federal Insurance paid in claims.
On appeal, Federal Insurance said the court should have determined itself, rather than leaving to the jury, whether the damaged bags should have been covered under the property-damage or extra-expenses portions of the insurance policy.
Federal Insurance also disputed whether the evidence supported the jury's finding of breach of contract and violation of the UCPA.
Lastly it wanted the award offset by the amount already paid on the insurance claims.
In vacating the award on Christmas Eve, the Nevada Supreme Court found that the question of whether the property-damage or extra-expenses provisions applied is a matter of contract interpretation, which makes it a question of law.
"Because categorizing Coast's loss under the policy is a question of law, the district court erred in sending it to the jury," Chief Justice Mark Gibbons wrote for the court.
Determining whether property-damage coverage applies requires finding when Coast Converters learned it was producing damaged bags, according to the ruling.
"The property damage provision applies to excess scrap produced before Coast became aware that continued use of its machines would result in the production of an increased number of defective bags," Gibbons wrote.
Once Coast Converters became aware its machinery was producing damaged bags, any damage from that point on should be covered by the extra expenses coverage, Gibbons wrote.
In addition to finding it improper that the jury determined what contract provision covered the loss from the damaged bags, the court threw out the UCPA award.
"Because the jury's verdict on Coast's UCPA claim was influenced by an improper interpretation of the contract, the verdict must be vacated," Gibbons wrote.
The matter is remanded to the district court.